Inside Hokodo

Hokodo’s pioneering approach to fraud risk management in B2B BNPL

Conor Bracken
Fraud Analyst

It’s no secret that Buy Now, Pay Later (BNPL) has experienced a period of overwhelming success during the pandemic. Consumers, constrained by unpredictable economic conditions and limited access to physical shopping experiences, relished the opportunity to make purchases they might otherwise have been unable to afford.

However, in light of recent devaluations and redundancies at some of the biggest embedded lending firms, it appears that the B2C BNPL bubble may be about to burst. 

Despite this downturn, the B2B BNPL space is brimming with prospering startups and innovative solutions designed to make trade between businesses easier, faster and more cost-effective. With a flurry of significant investments in recent weeks – including Hokodo’s $40 million series B round – investors are quickly jumping on to one of paytech’s most talked about trends.

However, the increasing popularity of B2B Buy Now, Pay Later is also attracting unwanted attention, namely in the form of fraudsters looking to make some easy money.

Reports show that B2C BNPL fraud rose by 66% between 2020 and 2021, while research published by San Francisco-based anti-fraud company Sift in March 2022 found that fraud attacks on BNPL platforms increased by 54% year-over-year. Estimations by Juniper Research suggest that between 2021 and 2025, losses from online payment fraud will amount to $206 billion.

At Hokodo, we’re now seeing the B2B market follow a similar path.

Fraud risk in B2B BNPL

B2B purchases are typically much larger than those in B2C, so it’s to be expected that BNPL providers offering financing on these transactions will be targeted by fraudsters. The fact that B2B BNPL is such a new area of payments also makes it especially susceptible to deception from scammers looking to take advantage of patchy defensive processes.

The trust of both buyers and sellers is essential for establishing a new payment solution, and being hit by a significant case of fraud could undermine this trust. Therefore, we must conduct thorough due diligence in order to protect all parties involved and ensure we can continue to provide BNPL solutions to the businesses that need them. However, it’s important to adopt an approach to mitigating fraud which prevents low risk buyers from being inconvenienced by controls and enables sellers to benefit from an optimal conversion rate.

This means running checks on buyers who choose to pay via Hokodo’s solution. It also means ensuring that our merchant and marketplace partners are running legitimate, legal businesses. Naturally, we want to offer financing to as many buyers as possible, but we don’t want to extend those terms to or via a business who could put the trust between buyers, sellers and Hokodo at risk.

Although B2B BNPL fraud can be carried out by merchants or buyers, it is more often conducted by professional or opportunistic fraudsters masquerading as buyers.

Types of fraud in B2B Buy Now, Pay Later

The types of fraud seen in B2B Buy Now, Pay Later do not fundamentally differ from those in B2C. Because the two solutions work in a similar way, fraudsters will often try to use the same types of fraudulent behaviour in their scams that have already proven effective in B2C. 

As BNPL grows in popularity as a B2B payment method, an increasing number of fraudsters will be attracted to the space, believing that they can benefit financially from the lack of historical data and infrastructure in place. B2B merchants adopting BNPL as a payment option often do so because it is proven to attract new business; fraudsters will be aware of this and will likely try to be one of the first new customers.

At Hokodo, we are well equipped to identify a wide range of fraud types to protect our merchants. Some of the most common types of fraud that we see include:

Identity fraud

This is the main risk that Hokodo is exposed to and there are several types of identity fraud that we see. We aim to target and prevent fraudsters who are:

  • Using stolen company details
  • Using fake or stolen identities
  • Using their own real identities with the hope of falsely convincing us they are associated with an existing business

Account takeover

Sitting alongside identity fraud in the wider impersonation fraud bracket is a scam known as account takeover. This is when a fraudster attempts to hijack the account of a real buyer, in order to purchase goods which they don’t intend to pay for. We monitor potential account takeovers, identifying behaviours and patterns to suggest a legitimate buyer’s account credentials may have been compromised.

No intention to pay

One of the risks that we see at Hokodo is when the buying business simply has no intention to pay for what they’ve purchased. They attempt to check out using Hokodo’s BNPL solution, hoping to receive the goods without ever having to pay for them. This type of fraud doesn’t necessarily involve any kind of impersonation and can be carried out by legitimate businesses. This risk is mitigated by credit (e.g. credit limit), fraud (e.g. behavioural detection) as well as collection processes and controls.

How we mitigate and manage fraud risks at Hokodo

A key strength of any BNPL provider is the ability to offer a fast and frictionless experience for the buyer. Our Fraud Analysts are experts at finding the balance between having enough data and time to make an informed decision, while minimising merchant churn, revenue loss and damage to our reputation. 

To ensure we are making sensible decisions which don’t sacrifice the seamlessness of the checkout experience, we often rely on alternative data sources to pull as much information as possible regarding each business. A unique benefit of working in B2B BNPL compared to B2C is that our decision-making engine and Fraud Analysts should theoretically have a greater source of online information to tap into when a business or buyer needs to be verified. KYB/C checks are vital when onboarding new businesses as it allows us to verify the customer and their business to ensure they are legitimate. 

There are a number of additional data sources which are deeply integrated into our fraud scoring models to identify any potential irregularities in an attempted transaction. These include enrichment of physical address data, email and domain information, IP and device information as well as a variety of biometric data comparing current and historical purchases behaviour. As Hokodo expands, we continue to lean on these data sources to pull the details required for us to complete our checks. 

If we can’t discern at the point of transaction whether a buyer is attempting to commit fraud, then additional verification checks can be carried out automatically or during a manual review. At this point, we cross-check information provided by the individual regarding the businesses with their online presence. Our robust decision-making engine means that these additional verifications or manual reviews are only required for a small percentage of transactions. 

As B2B BNPL continues to gather pace, an anticipated consequence is that it will attract an increasing number of fraudsters. Hokodo will continue to put customers first, but will also defend ourselves, our merchant partners and their buyers against potential fraudsters by obtaining as much information as possible from a variety of sources whilst maintaining a frictionless customer journey.

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